NASDAQ 100

Earlier today I mentioned that we could see a breakdown from the ascending triangle that had formed earlier in the day in the NASDAQ-100 (QQQQ). I said

"we have a bullish consolidation formation where we'd expect to see a bearish consolidation. The bullish aspect of this formation is severely diminished being that the trend preceding it is a down trend."

and....

"Here are both the upside and down side targets either way: Up: $32.40 and DOWN: about $30.50 where there is very little support, meaning the possibility of a retest of the next significant support zone around $29.50 is probable. Should that zone be tested and hold, a small purchase in the area makes sense as you can easily exit the position should support around $29.20 fail. More or less it's a low risk entry. "

So we got just about exactly what I was looking for, the consolidation patter was a bearish pattern that broke down, support at $30.50 only held for about 20 minutes and then it broke to the next level of support I identified around $29.50. That support level held, actually $29.71 was the low. What's more impressive is looking at this 10-min chart, the volume picked up after the support level held. Traders felt some confidence in the $29.50 area holding and did what I suggest you do, make a purchase in a low risk area.



Now, the next interesting thing to note here, take a look at this 60-min chart. Notice anything? To me, it looks highly probable that we are seeing an inverse Head and Shoulders Bottom forming. Today's hammer at the lows form the right shoulder. If the Q's can move above $33.70, then the neckline at $36-ish comes into play. A breakout above that neckline and we should see a rally that takes the Q's to $43! That's right-$43! In the area there's some decent overhead supply/resistance so I doubt we see too much more than that.



Take a look at the charts, and if you did like I mentioned earlier today, then you're looking at possibly a $13 or $14 dollar move or put another way a move of about 45% with your downside risk between $.50 and $1. That's a reward:risk ratio of anywhere between 14:1 and nearly 30:1. For me, anything over 3:1-4:1 is a trade worth taking.

Lets not get carried away with pipe-dreams though. We need to take an honest look and make an assessment of the other side of the coin. Below you are looking at a daily chart of the Q's and this is not pretty. Besides the waterfall sell-off that I alerted those on the contributor's list about in early September, we are now looking at a real consolidation pattern that makes a lot of sense as far as it's placement. This is a descending triangle and it is a bearish consolidation pattern. The support level is around $29.25 and should that support level break, we should see a move that drops the Q's to their knees. I'm thinking somewhere in the vicinity of $20-$22! That's right, another major waterfall type sell-off. This is the more reliable pattern at this time, but if you bought where I suggested, you have $1 or so of risk and then you can look at going short.





My gut feel is that this market is so oversold at this point and considering we are just about to enter the best season for the market and considering October tends to be the month that ends bear markets, I have to say I think the bounce scenario is more likely at this point. One other scenario that could play out is a false bear trap in which the Q's fall below support-maybe to $29, suck in the bears and their short sales and then launch a move above resistance (now around $29.50 in this scenario) and we get a major short squeeze that propels this market to the targets laid out in scenario "A" above. The market loves to make as many people wrong at any given time as possible, and that would do it. That's the shakeout play or Scenario "C".

I'm going to add some more analysis. If you are a regular reader, please email me as I have some news I want to share with you. If this is your first time here at Trade Guild, welcome, take a look around and get involved on the Tagboard on the right side of the blog (chat). Tell some friends about us and get the word out. The analysis here is always free, but if you like what you see and want to help keep it that way, support our sponsors, tell a friend or consider becoming a contributor.

More to come....